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How to raise capital for your business print Print

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Many businesses want to raise additional capital to fund their growth. There are a number of ways to do this, all dependent on what is the best solution for your business and you. This article explores the best way to raise that extra cash.

How much capital do you need?

Before you go down the path of seeking capital from outside your business, identify any other ways of raising capital. For example do you have any savings (either in the business or you personally) that you could use? If you have unused assets in the business (machinery that’s not used very often, buildings or excess stock you could shift), then weigh up the advantages of selling these first.

Once you have completed this exercise, determine how much you now need.

Funding

Equity capital and debt capital – the difference

The most common form of raising capital is with ‘Debt capital.’ This is money you’ve borrowed. It could be short-term funding like an overdraft for extra stock, or longer term loans for buying new equipment or a building.

Less common is ‘Equity capital’ where you raise cash in exchange for selling part of your business. In effect you give up some of the equity in your business for capital to help fund growth. More often than not, you need substantial amounts of capital to make it worth-while to the investor.

Debt capital

Most of us are familiar with borrowing money. The most popular sources are:

  • Friends and family. Often a first option as they are easy to approach, but do take care as owing money to people you know isn’t always a good idea.
  • The bank. Do you have any spare equity in your house that you could use? This is one of the most used forms of raising capital for small businesses as it’s often the cheapest. Interest rates with a property as security is almost always cheaper than unsecured finance. You might also consider asset finance, where you borrow cash over the value of an asset, work in progress or stock.

Read our article, increasing your chances when applying for a business loan.

Equity capital

If you require more capital than you can raise yourself or borrow, then you may wish to sell part of your business in return. The main providers are:

Angel investors - Angels are people (often other business owners) who think your business is promising and are willing to invest in it. They usually invest in businesses they’re familiar with, wanting either a return on their investment, some equity, or both.

The great thing about angel investors is that they’re usually keen to invest at an early stage, which can help with your start up. They bring their own experience to the table, which is knowledge you should take advantage of.

Visit the Angel Association of New Zealand’s website for an overview of angels and what they can provide.

Venture capitalists - These are investment companies or fund managers who provide cash in return for part-ownership of your business. Venture capitalists differ from angel investors because they’re typically looking to invest larger sums of money, which could be above and beyond what you need, and their requirements are much tougher. They may also not want to play such an active role in the management of your business, but possibly a role on your board so they tend to look at larger businesses.

For more information on the venture capital environment visit the NZ Venture Capital Association website. Also enquire through business networks such as the Employers and Manufacturers Association or the NZ Chamber of Commerce.

Other forms of capital raising

Government assistance

It’s well worth checking out whether or not your business qualifies for government funding. Mostly, this type of funding comes in the form of grants. You can find out more about these grants and whether you qualify by visiting the NZ Government grant site.

Corporate investors

At times large companies (it could be a customer or supplier of yours) invest in smaller businesses that they have a stake in seeing grow and expand.

Crowd funding

Growing in popularity are online capital raising forums such as Snowball Effect. They profile businesses seeking capital and then rely on the online investor network to raise the capital required.

Prepare your business for raising capital

Regardless of where you get the capital from, the more prepared you are the better.

These tips will help you present a strong business case to whoever you are talking to:

  • Speak to advisers – your business banker, lawyer and accountant are all people you should consult about finding investors. They’ll have good contacts and advice.
  • Build your business case – review your business plan and make sure it’s presented well. Define your goals, how you’re going to achieve them, why you need capital and how much you need. Justify your reasons in terms of growth and expansion opportunities. It helps to think of your business from an outsider’s perspective. Would you invest in it? Your task is to present a strong business case that answers this question.
  • Get your financials sorted – present your actual and projected cash flow and profits. Make sure you outline your assumptions when it comes to your forecasts.
  • Prep your business – get your processes and systems running smoothly, make sure you’re monitoring your KPIs and demonstrate how you’re providing an excellent customer experience. Look for ways to work smarter, try to reduce overheads, and make sure all marketing is measured so you can continue with what works and ditch what doesn’t.
  • Show you’re special – highlight what makes you stand out. Showcase your competitive advantage and point of difference. Demonstrate how you’ve protected your IP and if you can show that your business is scalable, so much the better.
  • Explain your team – show that they’re experienced, skilled, and ready for the journey. Also be upfront about what holes need filling. For example, if you need a more experienced marketing person, IT person or financial manager, it’s possible the investor can help you fill these gaps and it gives them an opportunity to add value to the business.
  • Look for leverage – don’t grab at the first person to offer money. Make sure you’ve done your due diligence on all potential investors so you can decide which will work best with you and your business.
  • Consider the risks – you are going to have to hand over some ownership if you decide on the equity option. Make sure you’re comfortable with this. Remember though that you may prefer to own 40% of a business worth $2,000,000 than 100% of a business worth $150,000.

Tools and resources

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